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Tax Investments May Acquire Bubba Brewing

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Tax Investments, Inc., is considering a cash acquisition of Bubba Brewing Co. for $202 million. Bubba Brewing will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carry-forward.

Years 1-5 6-15 16-20
Cash inflow (aftertax) $220,000 $240,000 $280,000
Synergistic benefits (aftertax) $20,000 $22,000 $40,000

The cost of capital for the acquiring firm is 12 percent. Should the merger be undertaken?

Please provide all steps.

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Solution Summary

The tax investments that may acquire Bubba Brewing is determined. The merger options are determined.

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Tax Investments, Inc., is considering a cash acquisition of Bubba Brewing Co. for $2.02 million. Bubba Brewing will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carry-forward.

Cost of Capital 12%

The cost of capital for the acquiring firm is 12 percent. Should the merger be undertaken?
Year Cash Flow (After ...

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